Why current market making solutions do not fit the needs of the Web3 space
Market making is a term that is used in many industries and often has an ambiguous meaning. Market making in this article refers to the activity of maintaining and improving the price of a token or coin and optimizing the market’s behavior regarding its price movement.
Just like the regular financial market, the crypto market needs market making activities in order to support a healthy market. However, market making and crypto have not always been a happy marriage. The market-making industry in the crypto space is extremely competitive. Despite the crowded market, market makers within the crypto space have remained traditional and the rate of innovation has been low, while the web3 space is constantly innovating.
Market making is an essential aspect of any successful tokenized crypto project. The main goal of market making is to create a less volatile and healthy market whilst at the same time facilitating the liquidation (selling) and acquiring (buying) of tokens. Market makers strive to fulfill these needs by aiding in creating a market for a specific token and routing the project in such a way that helps it discover its optimal price. These goals are often not realized, with many negative consequences impacting the success of promising projects.
Avatea is a unique platform that addresses this issue by decentralizing market making. Our goal is to make these tools available to everyone, ranging from institutional investors to crypto enthusiasts. This article is the first one of a series explaining the goal and vision of Avatea. This article describes the current problem in-depth and will be followed by articles expanding on how Avatea plans to solve this problem by introducing decentralized market making.
Returning to the main question: why does traditional market making not fit the needs of the Web3 landscape? The following three main reasons are at the root of this (soon to be changed) mismatch:
DeFi is being neglected
Crypto is all about decentralization and transparency, with a multitude of industries going through a revolution toward decentralization. Decentralized finance (DeFi) is one of the most prominent ones, with the potential to completely change the financial industry forever. With increased decentralization comes the need for decentralized exchanges and direct and efficient trading without centralized intermediaries.
We have seen repeatedly that centralized exchanges are inadequate in providing safe and trustworthy trading. FTX has been the latest collapse in a long list of mismanaged companies that caused severe damage to many individuals and financial institutions as well as the crypto industry as a whole.
Luckily, DeFi protocols such as decentralized exchanges (DEX’s) are changing the trading landscape, and provide a safe and secure alternative. Decentralized exchanges have been steadily increasing in terms of trading volume, and will likely continue to grow.
For effective market making to take place, the makers need to make the market where the actual trading takes place. It is clear however that the market is urging for more decentralization and traditional market makers have not caught up. Market makers primarily focus on centralized exchanges, as that is where they can make the most revenue, due to more efficient arbitrage and having an order book available. Most market making strategies aim to benefit from a situation where a trader can profit from the imbalance of asset prices.
With current trust and security issues involving many centralized exchanges, increasingly more traders opt (rightly so) for non-custodial storage of their crypto assets and decentralized exchanges. Structured token liquidation and token acquisition are already challenging enough on centralized exchanges and are nearly impossible on decentralized exchanges. Currently (but not for long), there are no tools that help users to perform market making activities with existing DeFi protocols. Avatea aims to enable all crypto investors to engage in market making activities in a non-custodial manner, by leveraging existing DeFi technology such as DEX’s and liquidity providers.
Only a fraction of the total supply is used to do market making
As almost all crypto investors have noticed by now, token dumps by big holders are one of the biggest reasons that promising projects might not reach their full potential. Due to the nature of fundraising in the crypto space, most tokenized projects have a handful of major stakeholders who possess a disproportionate amount of tokens. Investors holding a large number of tokens have an enormous price impact when selling large amounts at once, potentially causing the whole market sentiment of that project to shift, spiraling down.
To clarify, these big investors are essential for the crypto ecosystem and offer projects the means to create a business and convert their ideas into a reality. Most of these investors do not want to dump the tokens as they are aware that a negative price impact will also negatively impact the value of their assets. Many projects failed simply because of unstructured and uncontrolled token liquidations of big investors, without any bad intentions from the investor’s side.
Even the best market maker cannot work against these sudden and large token dumps. But offering these big investors the tools to ‘sustainably’ sell their tokens while minimizing the impact, would be a win-win. The investors will be able to get a return on their investment with minimal negative impact, while the project can maintain a healthy market for their token.
Here Avatea will drastically change the current market, by offering these tools to all investors, and even incorporating the whole vesting of private rounds into what we call the ‘sustainable trading’ technology. Thus, we offer a convenient way for investors to generate a steady return on their investment. Consequently, the market making effectiveness of a project that is using Avatea increases drastically. Take into consideration that regular market makers have access to a very small part of the circulating supply, which mostly consists of the team tokens. On the other hand, the Avatea market making algorithm has access to a significant part of the tokens from the private rounds of a token sale, which often consist of a great majority of the total token supply. Token dumps and rogue private investors destroying a promising project will become a thing of the past.
Hefty fees, limited management, and no direct control
Analyzing the current market making industry shows that all players charge similar fees and have a similar approach — a typical Web2 approach. Fees are often based on monthly retainers, averaging between 4000–8000 USD per exchange per month. Aside from an additional 1–4% token liquidation fee. For most projects, this is, especially in its starting phase, a hefty fee.
Projects also hand out all control — they either send their funds to a market maker or give trading access to their centralized exchanges accounts. From that moment on, projects become completely dependent on their market maker. Whenever a project wants to change its market making strategy or wants to actively respond to a changing market or project conditions it needs to wait for its market maker to become available and request these changes. A slow and rigid process often communicated through Telegram or even worse, email.
Aside from the lack of control, projects also lack accurate and live data in the form of a dashboard or a reporting interface. With Avatea, projects themselves are in control and manage their own market making, paying transaction fees through smart contracts instead of retainer fees through monthly invoices. Avatea offers a platform with a clear dashboard on which you receive key insights and can directly respond.
We at Avatea have experienced these major problems firsthand, and have decided to create a solution that will ease and solve all these challenges. We have created a full spectrum decentralized vesting and market making solution. We believe Web3 needs a different approach to market making, the Avatea approach. The goal of this approach is to give control back to the projects, and provide market making tools to the public. By solving all aforementioned problems through a single platform, we believe Avatea can have a huge impact on the future of market making.
In our next article, we will dive into the Avatea platform and explain exactly how it works, and how you can access and utilize it. If you can’t wait, go to avatea.io to learn more about vesting, decentralized marketing making, and decentralized liquidity providing, and stay up to date on our latest developments by following our socials, mentioned below!